Why Increasing Customer Lifetime Value Should Be Top Priority for Issuers
by Gaurav Mittal, Executive Vice President, Ethoca
Competition among card issuers is only getting more intense. Innovation in the payments industry has turned into a race for issuers to deliver the most enticing and valuable features and benefits—making it harder and more expensive for them to keep a competitive edge.
To illustrate that competitiveness: 50% of consumers surveyed for an Ethoca report said they would consider switching banks if they’re not getting the services they expect, such as mobile banking, digital receipts or the ability to manage merchant interactions through their banking app. This is all against the backdrop of consumers’ preference for everything digital, as shown by ecommerce’s explosion in recent years.
For an issuer to stay competitive, it has to offer the best digital banking experience, whether that’s making card replacement easy or providing great offers within its digital banking app. This all contributes to customers’ satisfaction and their lifetime value (LTV) to the issuer.
Why lifetime value matters
LTV—how much total monetary value a customer creates over the course of their relationship with a bank—is a valuable metric. It helps issuers gauge the “stickiness” of their relationships: How much are they spending to acquire customers? How well are they retaining them and growing revenue by offering each customer multiple services?
The business case for focusing on LTV is compelling: The Harvard Business Review says that a 5% increase in retention rates increases profits by 25% to 95%. Retaining and deepening existing customer relationships is typically far easier and less expensive than attracting and winning new customers. Research shows that financial services companies spend an average of $640 acquiring new customers, according to HockeyStack, while a Forbes article notes that the average LTV for retail banks in the U.S. is $4,500.
Issuers that want to improve LTV need to focus on offering services and experiences that make their customers’ lives easier and help deepen engagement. This will not only increase per-customer profitability but also customer retention—because the more products a customer has, the more likely they are to remain loyal to that issuer and keep using their card.
So how can issuers increase their customers’ LTV?
It’s critical to understand what today’s cardholders want and expect from their issuer relationships while taking steps to reduce costs. Moreover, issuers need to find ways to reduce customer friction—such as a card needlessly declined at checkout—to gain “top of wallet” status.
Here are a few ways issuers can increase LTV by providing a better customer digital experience:
1. Reducing cardholder friction—and false declines
If customers experience friction or have their card declined unnecessarily, they are less likely to use that card in the future. It’s incredibly important to make sure their card experience is simple and frictionless to help ensure they keep that card top of wallet.
Solutions that notify merchants immediately when a customer disputes a charge allow them to stop and refund an order—avoiding the need for a chargeback. This can improve cardholder authorization rates by ensuring only true fraud-related disputes get coded as fraud and reducing false declines at checkout that may prevent and deter cardholders from using their cards.
2. Decreasing unnecessary transaction disputes
With the rapid rise and adoption of ecommerce, transaction confusion has become a more common reason for disputes and chargebacks—which are costly to issuers and merchants and frustrating to customers.
Providing more insight into purchase details, like a clear merchant name and logo or an itemized digital receipt, can help reduce transaction confusion. Having this purchase information at their fingertips can significantly reduce the risk that consumers will dispute legitimate, non-fraudulent transactions because they simply do not recognize them.
3. Providing more services and customer engagement opportunities
Offering new banking features, especially in digital channels, helps create a more engaging experience for cardholders. Take, for example, issuers providing relevant offers for brands a cardholder likes based on their purchase history, directly in their bank app.
Consumers also often find it hard to know where, or how, to cancel their subscriptions. By offering them subscription control functionality through their banking app, issuers can provide a service that delivers a valuable and differentiated customer experience.
Another opportunity for creating a positive customer experience: making it easier for customers to start using a replacement card. An automatic billing utility lets cardholders automatically update their card number and details for any of their recurring payments whenever they are issued a new card—reducing their need to do that manually and preventing merchants and issuers from losing out on card spend.
Offering these types of services delivers more value, continually surprising and delighting customers beyond giving them the functionality that potentially saves them money and provides a great user experience.
4. Providing customer self-service—and lowering operating costs
Cardholders want to be able to access information about their card usage and manage their finances without having to contact the issuer.
Tools that provide insights and clarity about purchases through banking apps can prevent them from having to contact their issuer every time they have a question about a purchase, because answers to those questions should be available through their app.
Self-service can greatly reduce an issuer’s operating costs, with a Harvard Business Review article noting that the costs of offering customers self-service is generally measured “in pennies,” while it costs companies upwards of $10 per call when handled by a customer support agent.
Gaining a competitive edge for the future
Taking these and other steps can help drive consumer LTV for banks—an increasingly vital metric given the growing competitiveness in today’s market. Those that take steps to increase their LTV will be the ultimate winners.